SHARE-BASED COMPENSATION, COMMON STOCK ISSUANCES AND COMMON STOCK

Since June 2016, the Company has granted stock-based awards to its directors, officers and other eligible employees under the US Foods Holding Corp. 2016 Omnibus Incentive Plan (the “2016 Plan”). Up to 9 million shares of common stock are available for issuance under the 2016 Plan. Prior to June 2016, share-based awards were granted to the Company’s directors, officers and other eligible employees under the 2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan terminated according to its terms on December 21, 2017, which meant that no shares were available for future issues under that plan. However, the termination of the 2007 Plan had no effect on any previously granted and outstanding stock-based awards.

Total compensation expense related to share-based arrangements was $28 million, $21 million and $18 million for fiscal years 2018, 2017 and 2016, respectively, and is reflected in distribution, selling and administrative costs in the Company's Consolidated Statement of Comprehensive Income. No share-based compensation cost was capitalized as part of the cost of an asset during those years. The total income tax benefit associated with share-based compensation recorded in the Company's Consolidated Statement of Comprehensive Income was $6 million, $7 million and $6 million for fiscal years 2018, 2017 and 2016, respectively.

Common Stock Issuances—Certain employees purchased shares of our common stock, pursuant to a management stockholder’s agreement associated with the 2007 Plan. These shares are subject to the terms and conditions (including certain restrictions on transfer) of each management stockholder’s agreement, other documents signed at the time of purchase, and pursuant to the applicable law.

In August 2016, the Company established the US Foods Holding Corp. Employee Stock Purchase Plan (the “ESPP”) to provide its eligible employees with the opportunity to acquire common shares of the Company. In May 2018, the ESPP was amended and restated to increase the number of shares available for purchase under the plan from 1,250,000 to 4,750,000. The ESPP provides participants with a discount of 15% of the fair market value of the common stock on the date of purchase, and as such, the plan is considered compensatory for tax purposes. The Company recorded $3 million, $3 million and $1 million of stock-based compensation expense for fiscal years 2018, 2017 and 2016, respectively, associated with the ESPP.

Stock Options—The Company has granted to certain directors, officers and employees time-based options (“Time Options”) and performance-based options (“Performance Options” and, together with the Time Options, the “Options”) to purchase shares of our common stock. These Options are subject to the terms and conditions set forth in the relevant incentive plan documents and stock option agreements pursuant to which they were granted. The Options also contain certain anti-dilution provisions.

The Time Options vest and become exercisable ratably over periods of three to four years, either on the anniversary date of the grant or the last day of each fiscal year, beginning with the fiscal year issued. Compensation expense related to Time Options was $7 million in fiscal year 2018 and $4 million for fiscal years 2017 and 2016.

The Performance Options also vest and become exercisable ratably over four years, either on the anniversary date of the grant or the last day of each fiscal year, beginning with the fiscal year issued, provided that the Company achieves an annual financial performance target established by the Compensation Committee of our Board of Directors (the “Committee”). Awards granted prior to 2016 were subject to annual and, if applicable, cumulative performance targets for each of the four fiscal years, which were established by the Committee at the beginning of each respective fiscal year. As a result, under GAAP, the Performance Options were deemed to have been granted each year on the date when the annual financial performance target for the respective tranche of the option was established by the Committee. Performance Options granted prior to the 2016 award contain a catch-up vesting provision to the extent that the applicable annual financial performance target is not met.

The Company recorded compensation expense of $1 million, $3 million and $4 million for fiscal years 2018, 2017 and 2016, respectively, for the expected vesting of the Performance Options.

The Options are nonqualified, with exercise prices equal to the estimated fair value of a share of common stock at the date of the grant. Exercise prices range from $8.51 to $33.56 per share and generally have a 10-year life. The fair value of each Option is estimated as of the date of grant using a Black-Scholes option-pricing model.

The weighted-average assumptions for Options granted in fiscal years 2018, 2017 and 2016 are included in the following table.



	2018		2017		2016
Expected volatility	35.7	%	31.8	%	28.8	%
Expected dividends	—		—		—
Risk-free interest rate	2.6	%	1.9	%	1.5	%
Expected term (in years)	5.4		5.8		5.9

Expected volatility is calculated leveraging the historical volatility of public companies similar to US Foods. The assumed dividend yield is zero, because the Company has not historically paid dividends. However, as further discussed in Note 15, Related Party Transactions, the Company paid a one-time, special cash distribution to stockholders before the IPO in January 2016. The risk-free interest rate is the implied zero-coupon yield for U.S. Treasury securities having a maturity approximately equal to the expected term, as of the grant date. Due to a lack of relevant historical data, the simplified approach was used to determine the expected term of the options.

The summary of Options outstanding and changes during fiscal year 2018 are presented below.



	Time Options		Performance Options		Total Options		Weighted- Average Fair Value		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Years
Outstanding at December 30, 2017	3,009,552		1,605,417		4,614,969		$	7.47	$	18.79
Granted	680,863		365,381		1,046,244		$	14.55	$	28.69
Exercised	(726,989	)	(699,135	)	(1,426,124	)	$	6.55	$	14.34
Forfeited	(249,862	)	(48,831	)	(298,693	)	$	10.50	$	26.59
Outstanding at December 29, 2018	2,713,564		1,222,832		3,936,396		$	9.45	$	22.44	7.1
Vested and exercisable at December 29, 2018	1,103,649		883,591		1,987,240		$	7.55	$	17.97	6.1

The weighted-average grant date fair value of Options granted for fiscal years 2018, 2017 and 2016 was $14.55, $11.08 and $6.28, respectively.

During fiscal year 2018, Options were exercised with a total intrinsic value of $28 million, representing the excess of fair value over exercise price. During fiscal year 2017, Options were exercised with a total intrinsic value of $86 million, representing the excess of fair value over exercise price. During fiscal year 2016, Options were exercised by terminated employees for a cash outflow of $4 million, representing the excess of fair value over exercise price.

As of December 29, 2018, there were $12 million of total unrecognized compensation costs related to unvested Options expected to vest, which is expected to be recognized over a weighted-average period of two years.

Restricted Shares—Certain officers and employees were granted restricted shares (the “Restricted Shares”) in fiscal years 2018, 2017 and 2016 granted under the 2016 Plan. Prior to 2017, the Restricted Shares contained time-based vesting (the “Time-Based Restricted Shares”) and non-forfeitable dividend rights, none of which remain unvested. In fiscal year 2018 and 2017, the restricted shares were subject to performance conditions (the “Performance Restricted Shares”) and contained forfeitable dividend rights.

The Performance Restricted Shares were granted assuming the maximum award amount and vest on the third anniversary of the grant date if specific performance goals over a three-year performance period are achieved. The number of shares eligible to vest on the vesting date range from zero to 200% of the target award amount, based on the achievement of the performance goals. The fair value of the Performance Restricted Shares is measured using the fair market value of our common stock on the date of grant and recognized over the three-year vesting period for the portion of the award that is expected to vest. Compensation expense for the Performance Restricted Shares is remeasured at the end of each reporting period, based on management’s evaluation of whether it is probable that performance conditions will be met.

The summary of unvested Performance Restricted Shares outstanding and changes during fiscal year 2018 is presented below:



	Performance Restricted Shares			Weighted- Average Fair Value
Unvested at December 30, 2017	$	241,313		$	30.39
Granted	249,314			$	33.56
Vested	—			$	—
Forfeited	(41,804		)	$	31.90
Unvested at December 29, 2018	$	448,823		$	32.01

The weighted-average grant date fair value for the Performance Restricted Shares granted in fiscal years 2018, 2017 and 2016 was $33.56, $30.39 and $14.58, respectively. Compensation expense for the Restricted Shares was $2 million, $1 million and $2 million for fiscal years 2018, 2017 and 2016, respectively. At December 29, 2018, there was $4 million of unrecognized compensation expense related to the Performance Restricted Shares that is expected to be recognized over a weighted average period of two years.

Restricted Stock Units—Certain directors, officers and employees have been granted time-based restricted stock units (the “Time-Based RSUs”) and/or performance-based restricted stock units (the “Performance RSUs” and, collectively with the Time-Based RSUs, the “RSUs”) pursuant to the 2007 Plan and, after the IPO, pursuant to the 2016 Plan. The RSUs contain certain anti-dilution provisions. The Time-Based RSUs generally vest ratably over three to four years, starting on the anniversary date of grant. For fiscal years 2018, 2017 and 2016, the Company recognized $12 million, $6 million and $4 million, respectively, in compensation expense related to the Time-Based RSUs.

Prior to fiscal year 2017, the Performance RSUs vested ratably over four years, either on the anniversary of the date of grant, or the last day of each fiscal year (beginning with the fiscal year in which they were granted), based on the achievement of an annual operating performance target applicable to each tranche. For grants of Performance RSUs made prior to fiscal year 2016, those targets also provided for catch-up vesting if the respective annual financial performance target was not achieved but a subsequent cumulative financial performance target was achieved. Beginning in fiscal year 2017, the Performance RSUs vest at the end of a three-year vesting period based on achievement of certain, pre-established year over year Adjusted EBITDA growth and return on invested capital goals during a three-year performance period. The number of shares earned at the end of the vesting period range from zero to 200% based on the relative achievement of the performance goals.

The fair value of each share underlying the Performance RSUs is measured at the fair market value of our common stock on the date of grant and recognized over the vesting period for the portion of the award that is expected to vest. Compensation expense for the Performance RSUs is remeasured at the end of each reporting period, based on management’s evaluation of whether it is probable that the performance conditions will be met.

The Company recognized $3 million of compensation expense in fiscal year 2018 for Performance RSUs that are expected to vest. The Company recognized $3 million of compensation expense in fiscal year 2017 for the Performance RSUs that, at the end of fiscal year 2017 were expected to vest. The Company recognized $4 million of compensation expense in fiscal year 2016 for the Performance RSUs that, at the end of fiscal year 2016, were expected to vest.

A summary of unvested RSUs outstanding and changes during fiscal year 2018 is presented below.



	Time-Based RSUs		Performance RSUs		Total RSUs		Weighted- Average Fair Value
Unvested at December 30, 2017	909,292		276,553		1,185,845		$	26.79
Granted	564,951		269,116		834,067		$	33.48
Vested	(310,495	)	(127,276	)	(437,771	)	$	25.91
Forfeited	(126,907	)	(61,677	)	(188,584	)	$	29.45
Unvested at December 29, 2018	1,036,841		356,716		1,393,557		$	30.71

The weighted-average grant date fair values for the RSUs granted in fiscal years 2018, 2017, and 2016 was $33.48, $29.77 and $18.75, respectively.

At December 29, 2018, there was $27 million of unrecognized compensation cost related to the RSUs that is expected to be recognized over a weighted-average period of two years.

Equity Appreciation Rights—The Company has an Equity Appreciation Rights (“EAR”) plan for certain employees. Each EAR represents one phantom share of our common stock. The EARs also contain certain anti-dilution provisions. The EARs vest and become payable at the time of a participant's involuntary termination of employment or a change in control of the Company, in each case, as defined in the applicable agreement. EARs are forfeited upon voluntary termination of the participant’s employment. The EARs are settled in cash upon vesting and, accordingly, are considered liability instruments. No EARs were granted during fiscal years 2018, 2017 and 2016. Compensation expense for the EARs which vested for participants whose employment was involuntarily terminated during fiscal years 2018, 2017 and 2016 was de minimis.

As the EARs are liability instruments, the fair value of the awards is re-measured each reporting period until the award vests and is settled. Since vesting of all outstanding EARs is contingent upon performance conditions, as defined in the EAR plan, which are not considered probable, no compensation expense has been recorded to date for the outstanding EARs, except for that related to participants whose employment was involuntarily terminated, and as such, no liability has been recognized. As of December 29, 2018, there were a total of 344,359 EARs outstanding with a weighted average exercise price of $9.81 per share.